THE Central Bank of Nigeria (CBN) has finally indicated that the rate of the newly introduced special bills will go for 0.50 per cent.
Nigeria’s first issuance of special bills created to boost liquidity for the nation’s banks left investors disappointed after yields on longer-dated debt securities surged.
The Central Bank offered about N4.1 trillion ($10.5 billion) of 81-day special bills to lenders in the form of promissory notes at 0.5 per cent on Thursday, according to Chapel Hill Denham Securities. That’s much better than the zero interest the banks usually get for parking excess cash with the regulator.
But a day earlier, the CBN sold N38.7 billion of one-year Treasury bills at a yield 3.2 per cent — more than 20 times higher than the rate from the previous auction. By doing so, the special bonds were effectively out-priced for those wanting to trade them on the secondary market.
Bloomberg quoted Adetayo Adeyi, a portfolio manager at Asset Resource Management as saying that there is no point in buying it; “it’s way lower than one-year T-bills. Clearly no institutional investor will go and buy it.”
The frequency of auctions will depend on how much surplus cash banks are generating, Adeyi said.
Ayodeji Ebo, head of research and strategy at Greenwich Merchant Bank in Lagos, doesn’t expect the CBN to hold another auction of the special bills soon, given the size of the debut offering.
“Even if they do another, it will be very small,” said Omotola Abimbola, an analyst at Lagos-based Chapel Hill Denham.
Average yields on federal government bonds across the short and long tenor of the curve widened by 2 and 16 basis points respectively, FSDH Capital said in note to clients late Thursday.
The higher T-bills rate signals the regulator is trying to normalize interest rates, said Adeyi of Asset Resource Management.
The results of the bond auction that closes next week will set a new tone for the fixed-income market, she said. “Right now, people are protecting their bids” and bearish sentiment is expected to persist until there is clarity.
On December 2, the CBN issued a circular where it introduced special bills as an additional tool for liquidity management and also to deepen the financial markets. The features of the CBN Special Bills are as follows: Tenor of 90 days; zero coupon, as applicable yield at issuance will be determined by the bank; the instrument will be tradable amongst banks, retail and institutional investors; the instrument shall not be accepted for repurchase agreement transactions with the CBN and shall not be discountable at the CBN window; and the instrument will qualify as liquid assets in the computation of liquidity ratio for deposit money banks.
According to analysts from investment advisory firms, this means that the excess cash reserve requirements of banks will be refunded through a 90-day instrument to be priced as a zero coupon bill and the yield has now been determined by the CBN.
Banks can trade the bills, which also qualifies as liquid assets on their balance sheets. The aim is to allow banks exchange cash for an interest-bearing instrument and also reduce the negative effect on their earnings.
This could increase interbank borrowing as banks scramble for cash to meet consumer demand. In addition, another instrument as a “replacement for cash” would help mop up market liquidity, which could be a signal that interest rates may start to increase. It could also taper inflationary pressures says analysts from Zedcrest Capital.